I think it's important for young people to realize the time value of money and important of saving early. This should be drilled into their head in high school.

5k invested @ 18 years old = 120k @ 65 years old (assuming 7% growth)
5k invested @ 30 years old = 50k @ 65 years old
5k invested every year @ 18 years old = 1.8 million @ 65 years old
5k invested every year @ 30 years old = 800k @ 65 years old

Investing every year at a young age is the most impressive. Start 12 years earlier and you have 1 million more. Of course salary and savings rate are about as important.

This is a nice illustration of an important point, but I think you also have to consider the limitations. What 18 year old has 5k to invest every year? What money they do have may have more immediate purposes than stocks (education, rent, car, etc.).

It’s sad for me when my daughter told me nobody her age expects to live till they retire. Such a bunch of pessimistic people she knows. Maybe that’s why they don’t want to invest and just live at the moment.

Last edited by DrGoogle2017 on Fri Oct 06, 2017 12:09 pm, edited 1 time in total.

It is also important to save more and save often. Imagine you put away $5k every month until you retire and re-run the number.

60k/year from 18 to 65 yields 237 million. Somewhat unrealistic unless you have a very good job which you could reasonably have by age 30:
60k/year from 30 to 65 yields 100 million. I think most people would choose early retirement or a more lavish lifestyle.

60k/year from 18 to 65 yields 237 million. Somewhat unrealistic unless you have a very good job which you could reasonably have by age 30:
60k/year from 30 to 65 yields 100 million. I think most people would choose early retirement or a more lavish lifestyle.

Oh how I wish this were true, but according to my calculations $60k per year from 30 to 65, at 7% compounded annually, gets you just under $10 million?

For the average American, it may be good advice to save and invest as much as possible. For the average Boglehead, I'm not so sure. Many of us live well below our means and trade today's pleasures for tomorrow's financial security.

Financial assets today are quite expensive and will likely not earn much in the coming decades. A 60/40 portfolio will probably earn less than 2% real per year. Maybe we should take nicer vacations and go out more.

This is a nice illustration of an important point, but I think you also have to consider the limitations. What 18 year old has 5k to invest every year? What money they do have may have more immediate purposes than stocks (education, rent, car, etc.).

Agreed. I had a decent emergency fund established by 18, but the money I made from summer jobs and internships wasn't enough to cover all of my expenses as a college student. I was still net negative every year and had to take out student loans to cover the difference. It wasn't until I graduated and got my first "real" job at 22 that I was able to start saving and investing.

Financial assets today are quite expensive and will likely not earn much in the coming decades. A 60/40 portfolio will probably earn less than 2% real per year. Maybe we should take nicer vacations and go out more.

10 years ago, the S&P 500 was priced at 1557.
20 years ago, it was priced at 965.
30 years ago, it was priced at 320 (coincidentally, this was just before Black Monday and the eventual fall down to a price of 223 - the market was likely "overvalued" by all measures at 320).
40 years ago, it was priced at 93.

Knowing what we know now, any investor would happily buy at any point in the past at which the market was considered "overvalued." But I'm sure this time is different.

I think what you've said is important, but statements like this get me riled up. People need to know that compound interest matters, even if it's just a bank account making 1%. They have to know that if they always spend all that they make, they'll never retire. They need to know that it's not how much you make, but what percentage of your pay you save that determines when you can retire. Anything past that isn't helpful.

People love to tell other people what to do. We're all experts in our own lives. We all have regrets and missed opportunities and you, yes YOU, can avoid them with steps A, B, and C. We all have had successes and we had the perfect plan that made them happen. The problem here is everyone is different. People don't consider how the choices they're telling other people might have actually made them unhappy had they made that choice in the moment. The past will always favor extreme allocations to resources, but when planning for the future you should always do what you're actually comfortable with. How many of you would go with a 100% EM stock portfolio after the recent runup? How many of us wish we could have gone 100% 6 months ago? Or switched to 100% bonds/cash right before the 2008 financial crisis hit?

I have a friend who travels to all the corners of the planet. He saves all his (post-retirement contribution) money to do this. That's what drives him. He's aware of how important compounding returns are to accumulating wealth and still chooses his lifestyle because it's what he wants and what he's comfortable with. I have another friend who focuses almost all his free time into analyzing and valuing companies, even though all his investments are in index funds. He spends a lot less money than my traveling friend and so will be able to retire either earlier or more comfortably (or both), but he won't have the same experiences, won't have met the same people, or been as "worldly." Maybe he can do those things in retirement, but there's something about exploring places when you're younger. These are the tradeoffs we make, and everyone makes different decisions on them. Nothing should ever be "drilled" into anyone's head. You should be presented with facts and how some of your options interact with these facts and be allowed to make your own decision.

It’s sad for me when my daughter told me nobody her age expects to live till they retire. Such a bunch of pessimistic people she knows. Maybe that’s why they don’t want to invest and just lives at the moment.

I don't know what age your daughter is, but I'm in my mid-20s and I became conscious of money right before the financial crisis. A lot of people my age also became aware of money at the same time and had to deal with losing houses, parents losing jobs, and the immediately thereafter went into crippling debt to go to college. We're now surrounded by places like this forum that chant "experts don't know shit, everyone's corrupt in the industry, don't trust anyone, crashes are coming, but you should still invest in the market" (and if you're not on this forum, the news can be even less encouraging) and, shockingly, these people who already don't trust the financial system get confused and discouraged.

I don't claim to have a solution, but if you can talk to people directly, encouragement can go a long way. I got my girlfriend to start investing by opening a Barclays Dream Account. It took 8 months of gentle prodding before she was comfortable moving any money into any kind of new account, even if it was guaranteed money. She got used to saving enough money to max the monthly contribution and started getting excited about the interest going up. We talked about how looking for anything more than bank account returns will have downside risk, and eventually she decided she could stomach putting some of her extra saved money into a 60/40 fund. This happened 18 months after opening the new bank account. It takes time to break through this distrust and fear.

60k/year from 18 to 65 yields 237 million. Somewhat unrealistic unless you have a very good job which you could reasonably have by age 30:
60k/year from 30 to 65 yields 100 million. I think most people would choose early retirement or a more lavish lifestyle.

Oh how I wish this were true, but according to my calculations $60k per year from 30 to 65, at 7% compounded annually, gets you just under $10 million?

Haha you're correct. I missed a monthly/annually in the calculator. The other calculator I was using was annual. That calculation was 60k/month instead of year.

10 years ago, the S&P 500 was priced at 1557.
20 years ago, it was priced at 965.
30 years ago, it was priced at 320 (coincidentally, this was just before Black Monday and the eventual fall down to a price of 223 - the market was likely "overvalued" by all measures at 320).
40 years ago, it was priced at 93.

Knowing what we know now, any investor would happily buy at any point in the past at which the market was considered "overvalued." But I'm sure this time is different.

So the reason we should buy stocks is because they have done well in the past?

I'm no spring chicken, and not so long ago I had a similar-aged colleague say, in the context of a several-person conversation about how much to set aside in our 401(k)s in the upcoming year, not in a joking manner (I know her communication style well enough to distinguish - we worked closely together in adjacent cubicles for years), she thought she would have enough to retire at 83, but expected to die at 82.

So the reason we should buy stocks is because they have done well in the past?

Throughout all of recorded human history, the rate of return on capital has been impressive. To bet against a globally-diversified portfolio of equities is to bet against mankind's continued innovation.

You seem to be suggesting that we will be experiencing "the lost 4 decades" going forward or some such. While anything is possible, this seems like an incredibly pessimistic outlook. I'm interested in living my life with a more optimistic view.

I don't claim to have a solution, but if you can talk to people directly, encouragement can go a long way. I got my girlfriend to start investing by opening a Barclays Dream Account. It took 8 months of gentle prodding before she was comfortable moving any money into any kind of new account, even if it was guaranteed money. She got used to saving enough money to max the monthly contribution and started getting excited about the interest going up. We talked about how looking for anything more than bank account returns will have downside risk, and eventually she decided she could stomach putting some of her extra saved money into a 60/40 fund. This happened 18 months after opening the new bank account. It takes time to break through this distrust and fear.

Puddles

I'm 74 years old, and I still haven't broken through the distrust and fear.

Throughout all of recorded human history, the rate of return on capital has been impressive.

Not for the 1990 investor in Japanese equity, who paid too much.

Similar for the 2000 investor in S&P 500, though it's too soon to be sure.

Pray tell lazyday, why do you invest in stocks?

For partial ownership of companies that earn money.

If global 1/CAPE today is maybe 4%, then my companies earn 4% on what I pay for them. Some of that comes to me in dividends, some is reinvested in the companies. If the cost of capital is equal to the return on capital, I guess it follows that my total return should be 4% real over time, before adjusting for changes in valuation. If valuations drop partway towards historical averages, and I also invest in bonds earning just over 0%, then my return will be much lower.

If global 1/CAPE today is maybe 4%, then my companies earn 4% on what I pay for them. Some of that comes to me in dividends, some is reinvested in the companies. If the cost of capital is equal to the return on capital, I guess it follows that my total return should be 4% real over time, before adjusting for changes in valuation. If valuations drop partway towards historical averages, and I also invest in bonds earning just over 0%, then my return will be much lower.

Gotta say I mostly agree with you there. I would also expect roughly 4% real returns when investing in a market with a 4% earnings yield.

Although if valuations return to their historical average, it follows that the shares you buy after that point should have a higher expected return, since earnings yields are higher. I've got at least 3 decades to continue dollar cost averaging into the market. I expect that I will end up buying at a large range of valuations over that period, and hopefully it will average out to an overall "fair" price.

Good thing I specified "globally-diversified" in the next sentence. Oh wait, you cut that part out.

Sorry about that. My opinion is that extreme editing of quotes makes posts more readable, though even careful editing can change meaning a bit. Here I was too fast and careless and should have included the next line.

Anyway, I’m thinking that since 2000, global market weighted equity hasn’t done so well? I don’t have the numbers. I also expect its 30 year performance from 1/2000 to be poor.

It is also important to save more and save often. Imagine you put away $5k every month until you retire and re-run the number.

60k/year from 18 to 65 yields 237 million. Somewhat unrealistic unless you have a very good job which you could reasonably have by age 30:
60k/year from 30 to 65 yields 100 million. I think most people would choose early retirement or a more lavish lifestyle.

Yeah definitely compounding is the key to financial success. Save early and let the compounding machine work!

We're now surrounded by places like this forum that chant "experts don't know shit, everyone's corrupt in the industry, don't trust anyone, crashes are coming, but you should still invest in the market" (and if you're not on this forum, the news can be even less encouraging) and, shockingly, these people who already don't trust the financial system get confused and discouraged.

I don't claim to have a solution....

You have a much different perspective of this forum than I do. It encourages common sense, time-tested financial management while avoiding unnecessary costs that limit your ability to grow wealth. Posts like this basically sum it up: Work hard, live below your means, save money, invest it wisely, do the same thing over many years, and you will have financial independence, no matter your income level. Almost always, raising a family is included in there as well. Nothing to be confused or discouraged about in that advice. That is the solution.

Of course, you have to put aside your own gratification for material things or travelling around the world, etc. But that's a choice.

Nothing should ever be "drilled" into anyone's head. You should be presented with facts and how some of your options interact with these facts and be allowed to make your own decision.

High school is the best time for kids to learn this stuff and you really do have to drill it in their head at that age. I had a personal finance class in high school and the teacher was very good. The Boglehead's Guide to Investing would be the most valuable course taught in high school and should be part of the core curriculum. The sooner you learn it the better and some people never learn it and they end up with nothing in retirement savings.

I think it's important for young people to realize the time value of money and important of saving early. This should be drilled into their head in high school.

5k invested @ 18 years old = 120k @ 65 years old (assuming 7% growth)
5k invested @ 30 years old = 50k @ 65 years old
5k invested every year @ 18 years old = 1.8 million @ 65 years old
5k invested every year @ 30 years old = 800k @ 65 years old

Investing every year at a young age is the most impressive. Start 12 years earlier and you have 1 million more. Of course salary and savings rate are about as important.

I think the better comparison may be calculations like these:
$5k/yr invested from 18 to 65
$10k/yr invested from 22 to 65, minus the cost of a BA/BS (tuition/fee/room/board/student loan interest/etc)
$15k/yr invested from 24 to 65, minus the cost of a MA/MS
$20k/yr invested from 30 to 65, minus the cost of a doctorate

Of course, the $5k, $10k, $15k, and $20k should be adjusted based on an individual's circumstances, intended savings rates, intended retirement dates, and likely salaries based on education and field. (One may be in a field where a BA/MA adds little value, and a doctoral degree is what adds the value. Or, one may be in a field where a doctoral degree is not viewed as helpful or needed for non-academic jobs).

I feel people should do this sort of calculation when deciding whether to go to college, whether to get an advanced degree, what field to study, and so on.

This sort of calculation shows that spending many years getting a PhD degree in a field that is not well compensated and has few jobs is very difficult to justify economically. One would need to be very, very passionate about that field. (There is more to life than money, though, and if one has this passion, then following that passion may be best).

I think it's important for young people to realize the time value of money and important of saving early. This should be drilled into their head in high school.

5k invested @ 18 years old = 120k @ 65 years old (assuming 7% growth)
5k invested @ 30 years old = 50k @ 65 years old
5k invested every year @ 18 years old = 1.8 million @ 65 years old
5k invested every year @ 30 years old = 800k @ 65 years old

Investing every year at a young age is the most impressive. Start 12 years earlier and you have 1 million more. Of course salary and savings rate are about as important.

I think the better comparison may be calculations like these:
$5k/yr invested from 18 to 65
$10k/yr invested from 22 to 65, minus the cost of a BA/BS (tuition/fee/room/board/student loan interest/etc)
$15k/yr invested from 24 to 65, minus the cost of a MA/MS
$20k/yr invested from 30 to 65, minus the cost of a doctorate

Of course, the $5k, $10k, $15k, and $20k should be adjusted based on an individual's circumstances, intended savings rates, intended retirement dates, and likely salaries based on education and field. (One may be in a field where a BA/MA adds little value, and a doctoral degree is what adds the value. Or, one may be in a field where a doctoral degree is not viewed as helpful or needed for non-academic jobs).

I feel people should do this sort of calculation when deciding whether to go to college, whether to get an advanced degree, what field to study, and so on.

This sort of calculation shows that spending many years getting a PhD degree in a field that is not well compensated and has few jobs is very difficult to justify economically. One would need to be very, very passionate about that field. (There is more to life than money, though, and if one has this passion, then following that passion may be best).

That is a good comparison, but the career is not as important as the savings rate. There was a story about a factory worker that retired a millionaire that lived modestly but just invested in an S&P500 index fund every year. The point is that you don't need to be a doctor or a lawyer to retire comfortably IF you are committed to saving and investing. Although certainly if you work hard in school it will be much easier.

I think it's important for young people to realize the time value of money and important of saving early. This should be drilled into their head in high school.

5k invested @ 18 years old = 120k @ 65 years old (assuming 7% growth)
5k invested @ 30 years old = 50k @ 65 years old
5k invested every year @ 18 years old = 1.8 million @ 65 years old
5k invested every year @ 30 years old = 800k @ 65 years old

Investing every year at a young age is the most impressive. Start 12 years earlier and you have 1 million more. Of course salary and savings rate are about as important.

I think the better comparison may be calculations like these:
$5k/yr invested from 18 to 65
$10k/yr invested from 22 to 65, minus the cost of a BA/BS (tuition/fee/room/board/student loan interest/etc)
$15k/yr invested from 24 to 65, minus the cost of a MA/MS
$20k/yr invested from 30 to 65, minus the cost of a doctorate

Of course, the $5k, $10k, $15k, and $20k should be adjusted based on an individual's circumstances, intended savings rates, intended retirement dates, and likely salaries based on education and field. (One may be in a field where a BA/MA adds little value, and a doctoral degree is what adds the value. Or, one may be in a field where a doctoral degree is not viewed as helpful or needed for non-academic jobs).

I feel people should do this sort of calculation when deciding whether to go to college, whether to get an advanced degree, what field to study, and so on.

This sort of calculation shows that spending many years getting a PhD degree in a field that is not well compensated and has few jobs is very difficult to justify economically. One would need to be very, very passionate about that field. (There is more to life than money, though, and if one has this passion, then following that passion may be best).

That is a good comparison, but the career is not as important as the savings rate. There was a story about a factory worker that retired a millionaire that lived modestly but just invested in an S&P500 index fund every year. The point is that you don't need to be a doctor or a lawyer to retire comfortably IF you are committed to saving and investing. Although certainly if you work hard in school it will be much easier.

Good point. My suggestion is what one would want to see when considering an advanced degree in a field with few job prospects, while your suggestion is what one would use to see the impact of starting early.

Savings rate would be 5k/year at 18 to 65 vs 6k/year at 18 to 65. Even increasing savings by a few dollars a day can have staggering impacts.

"Invest early and often" is part of the Boglehead philosophy. (https://www.bogleheads.org/wiki/Boglehe ... philosophy). In many ways, it is one of the more important parts. Without a high savings rate and a long time for money to grow, other things don't matter. For example, we spend a lot of time discussing domestic vs international stock, withdrawal methods, and factor tilts. However, increasing one's savings rate by 5% generally has a far bigger effect on the portfolio than changing the size of one's factor tilt or international allocation by 5%.

I just want to know what these alternatives other people are passively doing to plan ahead instead of equities. If the next 40 years are even a full 2% CAGR lower than the previous 40 years the S&P will have done it's part for my purposes. Heck we can even go 45 years and enter the market in November 1972 and still be well above 10% CAGR to today.